Disintermediation or a FinTech Mirage?

Disintermediation or a FinTech Mirage?

The advent of BlockChain has polarised the technoscenti more than any other technology since the internet itself came to prominence over 20 years ago. If adopted widely, it could sound the death knell for financial and other intermediaries and revolutionise not just finance but all provenance-based transactions. It could be deployed to certify and distribute everything from art to diamonds and music to bananas.

However, tech and hype are common bedfellows. One need only consider the precipitous descent of recent “unicorn” Powa Technologies to see where the dangers lie.

At best, BlockChain is seen as a democratising technology which enables users to trade on a P2P basis, circumventing exploitative middlemen, notably credit card providers and banks. At worst it is seen as synonymous with the “Silk Road” which provides an anonymous interface to the dark web, enabling traceless payments to be made for drugs, arms and other socially repugnant lines of trade.

This diametrically opposed stand-off is, to some extent, based on an erroneous conflation of BlockChain with Bitcoin.

Bitcoin is the most famous crypto-currency and Bitcoin transfers, for both legal and illegal transactions, are processed via the BlockChain. BlockChain is a decentralised ledger system which supports not only cryptocurrency transfers but also a wide and ever-expanding range of digital commerce transactions and transfers. For example, BlockChain can also be used for transfers of digital assets (such as copyright licences), transfers of securities, invoicing, and issuance and administration of insurance policies. The potential list of applications is almost infinite.Furthermore, whilst Bitcoin was the first and somewhat flawed model, there is now an ever expanding list of cryptocurrencies and associated platforms ranging from the highly acclaimed Ethereum and associated Ether currency (the value of which has increased 1000% in recent months) to lesser known examples such as “Potcoin” which services the legalised cannabis industry.

Detractors see the distributed, disintermediated nature of the technology and concomitant lack of central control as a bar to growth as governments will suppress what they cannot control and what they find difficult to tax. Focal to the concerns of the establishment are that key tools of monetary control, notably quantitative easing, would be completely undermined if there were one or more viable alternative currencies, the supply and control of which were outside the sphere of influence of government. US economist, Paul Krugman, has written that “Bitcoin is evil” and he is not alone. One can understand that vested interests, notably in the financial services industries, are trying to protect their domains against the BlockChain barbarians.

It is clear, however, that central banks and governments think that BlockChain poses a material, existential threat, which is best addressed through a combination of embrace and competition. This is evident from the recent reports of the advent of a proto-currency known as RSCoin, jointly developed by computer and the Bank of England. It works on the BlockChain platform but, rather than promote a libertarian agenda, it would be used as a tool of state control, allowing the central bank to keep a tight grip on the money supply.

Maybe the clearest guide to the future comes from the clever money. For those who think that the technology is a fad or craze, it should be borne in mind that American VCs invested over $1 billion in bitcoinbased ventures in 2015. This exceeds the sum they invested in internet ventures in 1994 and it looks like they got it right with the internet.

If there continues to be a standoff between the believers and the cynics, we may never progress. The success of businesses built on BlockChain relies on widespread validation and consensus. Conferences, meetups, seminars, and endless noise will not underpin the necessary paradigm shift. Unless the financial services community overcomes its fear of disintermediation and redundancy and embraces the BlockChain through investment and adoption, the promise and potential will simply rust and crumble.